June 12, 2013 Kuwait Airways Set for Privatization…Again.
Persian Gulf airlines are currently in a period of transition. The various governments in the region have over the past several years been looking to transition out of the state owned airline business. For the profitable airlines this isn’t a problem; however, for the marginal airlines this has been a huge problem. State governments despite the desire to end funding of these unprofitable airlines, have a strong interest in seeing the airline remain in business. There are two solutions to this problem. First, the state can get the airline profitable and then sell it, or they can retain an ownership stake in the airline and continue to pump money in. The Kuwaiti government according to the latest amendment to their privatization law is going to continue to pump money in to Kuwaiti Airways further disrupting the privatization plan.
Over the past five years Kuwait Airways has lost in excess of 370 million US dollars and has over a billion dollars in debt. While the size of their debt and losses are low compared to US airlines they are less than a 10th the size of US major carriers. Kuwaiti hopes to turn this around with a fleet modernization plan, but in the one area of the world where there is cheap jet fuel, fuel prices are clearly not their only problem. Kuwait Airways also suffers from a route network largely copied by Emirates, Gulf Air, Qatar, and other more popular middle eastern carriers. Kuwait Airways also has a small route network, a lack of serious partners, and a soft product that is at best is barely in the pack with the other gulf carriers. A new fleet will not be enough to do it for them, they need more than that to become profitable and successful. Based on current plans I just don’t see future success for them.
The fact that Kuwait airways will probably not be successful on its own has keep the airline in government limbo since the initial privatization order in 2008. The current amendment to the privatization bill would force the government to pay off 1.5 billion US dollars of debt and would allow the government veto power over major decisions. This veto power is similar to the “golden share” US based Northwest Airlines had over Continental Airlines after a hostile takeover play in the mid-1990’s. Also, the government will keep 10% of the general stock in the company.
This current plan for Kuwait Airways will probably not come to pass for two reasons. First, the airline is set to go public upon profitability. Kuwait Airways so far has shown no potential for profitability in its current form. However, even if the airline does go public, which foreign investor would buy the 35% stake in the airline when the government has veto power over major decisions? With the Northwest-Continental deal, the golden share was held by a for-profit company, not a governmental body. This meant that the veto power was wielded by an organization that was looking after the financial health of the company. In this case the Kuwait government will probably act like most governments do and look after its own interests and not the interests of the airline. As such they are a poor holder of the golden share here and foreign investors will be dissuaded by that fact.
Whatever happens with this new law or the airline one thing is certain, the Kuwait government needs to get out of the airline business and stay out.